Instead of almost halving error and fraud rates from 9% to 5% it managed only to reduce it to 8.1% - meaning £2.27 billion losses.

Around 400 extra staff were switched to the two-year push which HMRC estimates helped prevent an extra £230 million a year being paid out wrongly.

The National Audit Office welcomed what it said were "innovative" measures which had begun to show results in tackling particular problems. But it noted that HMRC had targeted cases most likely to be affected and that one in five of all claims - 1.4 million - were still being overpaid.

There had been "little progress" in dealing with people failing to declare partners' income or in checking claimants' stated work and hours, it said. The two areas accounted for £1 billion of the fraud and error in 2010/11 while £640 million was down to children being wrongly included in claims.

NAO head Amyas Morse - who last year declined to sign off HMRC's accounts because of tax credit fraud and error - said it faced "significant challenges". He added: "To tackle error and fraud effectively, there needs to be an improved understanding of risks and better use of information."

Labour MP Margaret Hodge, chairwoman of the Commons public accounts committee, demanded senior officials "get a grip" of the issue and resolve "deeply worrying" issues. She also warned HMRC not to "take its eye off the ball" despite the fact that tax credits are to be replaced by the new universal credit.

She said: "It set itself a target...which it missed by a mile. In 2010/11 error and fraud was still at 8.1%, with £2.27 billion lost to the taxpayer - £850 million higher than expected and money that could have been spent on our schools and hospitals.

"According to HMRC's own figures, the majority of this £2.27 billion - £1.6 billion - was due to error rather than fraud by claimants. I also find it deeply worrying that even after HMRC has taken action, one in five claims still contain error or fraud."